FINANCIAL TIMES
The “Genghis bonds” issued by Mongolia last week might already be losing its sparkle as political turmoil rocks the country. But the specter of political risk hasn’t deterred investors from piling in on Morocco’s maiden dollar-denominated bond.
The North African country, which is under pressure to plug budget gap and contain the kind of protests that have brought down regimes in other parts of the Middle East, raised $1.5bn in a dual-tranche offering on Wednesday.
Investors put in $6bn of orders for the 10-year $1bn tranche of the issue, allowing the country to price the bond at a yield of just 4.25 per cent. The smaller 30-year $500m tranche of the issue, priced at a yield of 5.5 per cent, received $2bn in orders, a source told beyondbrics.
Morocco is the latest in a line of so-called “frontier countries” to hit up the international bond market. In recent months, countries from Zambia to Bolivia and more recently El Salvador and Mongolia have all rushed to tap the market’s seemingly bottomless appetite for EM debt and lock in record-low borrowing rates.
On the demand side, investor interest in frontier countries have been driven by the dismal bond returns from developed countries and more established EM countries like Brazil and Mexico – a trend that beyondbrics has written about here.
As was the case in El Salvador and Mongolia, both of which issued bonds last week, investors have been willing to overlook political risks in order to secure incrementally higher bond yields.
And while all the issues have so far been well oversubscribed there is a small but growing minority of critics who think the prices no lower reflect the risks in investing in these countries.
The Moroccan issue is rated BBB- by S&P, just making investment grade. At 4.25 per cent, the yields on the bond is higher than the 3.561 per cent average yield in the EMBI Global BBB credit bucket. (The EMBI Global contains USD-denominated EM sovereigns and 100% government owned or guaranteed quasi-sovereigns but includes all levels of BBB credits from BBB+ to BBB-).
As this Reuters article noted, the bond offering is coming at a delicate time for the country:
The monarchy – whose descent from the Prophet Mohammed has been a powerful deterrent to popular challenges to its authority – instituted constitutional reforms last year in the wake of the Arab Spring in the Middle East, deferring more of its power over political, economic and security affairs to the elected government.
But trying to correct deteriorating public finances without inciting more protests, which would probably include political demands to make the monarchy more of a symbolic ruler, looks an increasingly tough task for the authorities. That is making them reluctant to heed IMF demands and cut massive subsidies on staple goods and is forcing them to seek new sources of government revenue.
S&P, which put Morocco on negative outlook watch in October, has more on the state of the country’s public finances:
The general government balance was broadly in balance during the past decade. However, deficits have risen to over 4% of GDP during 2011 and 2012 as spending, especially on fuel subsidies, has increased and driven the primary balance deeper into deficit. We expect that cuts in subsidies will see a primary surplus return in 2013 and the net general government debt peak at an estimated 41% of GDP in 2012.
Morocco’s external financing needs used to be contained due to low external debt and a current account close to balance or in surplus. Since the onset of the global financial crisis, however, the current account deficit has risen fast, reaching by our estimate an average of over 7.5% of GDP during 2011-2013. This has been partly fueled by rising oil prices and a poor harvest in 2012.
Although official foreign exchange reserves have fallen sharply from their peak, we estimate immediate gross external financing needs at a still-moderate 93% of current account receipts plus usable reserves (in 2012) and expect them to stabilize at around 100% by the middle of the decade (from less than 70% before 2007).
S&P said it doesn’t think the country faces any serious immediate refinancing risks following the approval in August by the IMF of a $6.2bn precautionary credit line.
That might be true, given that Morocco is among one of the more stable countries in North Africa. But given the economy’s dependence on crisis-stricken Europe, there is no guarantee that things will stay that way. As the situation in Mongolia this week and the events of Arab Spring show, thing can all change very quickly.
As such investors would be wise take a hard look at whether they are being properly compensated for the political risks.
Barclays, BNP Paribas, Citigroup and Natixis acted as bookrunners on the transaction.
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